Entries from August 2019 ↓

The critical consumer

RYAN By Guest Blogger Ryan Lewenza


My son and I like to play the game Jenga. That’s the popular game where you strategically pull blocks out from the tower and the one who pulls the last block that causes the tower to fall loses (generally me). Playing this recently made me realize that Jenga is a good metaphor for Trump’s ongoing trade war and its impact on the global economy.

As the two countries go tit-for-tat, escalating the trade war, blocks are starting to be pulled out from the tower (i.e. global economy). These ‘blocks’ are currently concentrated in the business sector, while the critical consumer has so far been largely unscathed.

The impact of Trump’s trade war is being felt on the business side, particularly declining global trade volumes, a slowing manufacturing sector and contracting business investment.

Look at the chart below. This tracks manufacturing activity across the globe and you can see that manufacturing activity has been in steady decline since early 2018 – Trump started the trade war with China in March 2018 when he announced tariffs on China steel and aluminum and other Chinese goods. Coincidence?! I think not!

Manufacturing Has Been Declining Since Early 2018

Source: Bloomberg, Turner Investments

All this trade uncertainty is causing businesses to pull back on spending, with business investment contracting in the second quarter – the first time since 2016. Despite Trump’s tweet this week suggesting the Fed is at fault for the slowdown in the manufacturing sector, this just doesn’t jive with reason and the data.

US Business Investment Contracts in Q2

Source: Bloomberg, Turner Investments

This is not good and I believe is a direct consequence of Trump’s trade war. The concern then is if the slowdown starts to spread, impacting consumer spending. If that goes, we have a recession. And Trump is then likely out on his butt come 2020.

So what is the outlook for the US consumer?

The consumer actually looks pretty good, which is critically why we’re still in the bullish camp and believe a recession is unlikely over the next 9-12 months. Here’s what the US consumer has going for them:

  • The US labour market is on fire! Since 2015 the US economy has added 200k jobs per month on average, pushing the unemployment rate to a 50-year low of 3.7%. If you have a job then you have income to spend.
  • Now you only spend that income if you’re confident about the economy and your job. The Consumer Confidence index currently sits at a high 135, well above the long-term average of 93, a positive sign for consumer spending.
  • Finally, unlike us Canadians, our friends south of the border have been tightening up their belt by reducing their debt levels and improving their balance sheet. Currently, the US debt to disposable income ratio sits at 126% compared to us profligate Canadians at 170%.

Putting it all together I believe the US consumer looks very strong, which is key as they represent nearly 70% of US economic activity.

US Consumer Accounts for 68% of Economic Activity

Source: Bloomberg, Turner Investments

As long as Trump’s trade war doesn’t spillover into the consumer, resulting in job losses and hits to consumer confidence, I think they will keep spending at the malls and on Amazon. This should then allow us to avoid a recession, and the US/global economy toppling over like my Jenga game with my boy. I only wish someone would share this with Trump! Since he “knows the biggest words” I think he’ll grasp this metaphor.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.



Here’s the plan. Buy a house. Pay it off. Hope for the best.

That’s the strategy so many people follow. And today, with real estate at ridiculous levels, it means scores of families are trapped. Debt-servicing costs are so high there’s nothing left at the end of the month for the other stuff – an RRSP contribution. Or feeding the TFSA. Or the kid’s education fund.

Remember that scary stat from yesterday? The average Canadian in the first quarter of this year saved $20 a month. Twenty bucks. It’s nothing. Financial failure. If for some reason real estate stops appreciating, or goes into reverse, or the market tumbles and owners can’t easily sell, it’s a crisis.

Many people justify this strategy by saying (a) I got a fat mortgage and used leverage and (b) paying the loan off is the same as investing because I’m building up equity. So bug off, Garth.

Okay, relax. I understand there are valid reasons for paying down a mortgage – even aggressively, as many do (doubling up payments, making prepayments or lump sum deposits). Especially today, where home loans are often huge (a $1 million borrowing is now common in the GTA and Vancouver).

Paying it off: the Holy Grail

For example, many people have taken long amortizations – thirty years – in order to keep the monthly low. But the longer the am, the more money is sucked off as interest, so it makes some sense to pay it down. Also people nearing retirement should be trashing debt (sadly over a third still have a mortgage after they stop working).

There’s also the argument that when GICs and high-interest savings accounts are paying 2% that paying off a home loan at 3% is financially smart. Besides, this is a forced-savings plan. Facing a monthly mortgage payment makes you be disciplined, since otherwise you might spend half on women and weed and waste the rest. There are psychological benefits, too, since people have this weird nesting instinct and think they can retire and live on air, so long as they have the house paid off.

And speaking or retirement, a paid-off house also represents a pool of equity which can be tapped into as necessary through a HELOC or one of those evil reverse mortgages. Of course, it can also be sold for (hopefully) a tax-free capital gain later, and provide money to finance thirsty underwear or one of those sexy motorized wheelchairs. Yahoo.

Cruise some of the most popular financial web sites, especially those aimed at women, and you will see this pay-off-the-mortgage, trash-debt meme is at the heart of all advice. True enough, debt sucks. Especially when the economy turns south, asset values fall and unemployment goes up. A big, throbbing mortgage can squish you.

But wait. There are bigger goals.

But this is not a blanket strategy. There are also good reasons to just feed the mortgage the minimum amount and get invested in things like your TFSA.

First, you need to diversify. Seriously. Real estate is like every other asset class, prone to fluctuations. If you put all your net worth into one property at one location in one city, you’re courting risk. That could be from macroeconomic events (a recession, rising rates) to the micro (the guy next door buys an 80-foot motorhome, or the city approves a cell tower across the street). Always have a Plan B.

Second, houses don’t pay you money when you get old, droop and stop working. In fact, they cost money. You need cash flow far more than a roof when you retire, and it takes most people decades to build a pool of financial assets.

Third, the returns from portfolio investing have far outstripped real estate investing over the past decades, and across the country. Sure, some pockets have rewarded people with speculative returns on houses, but that’s not the norm. And those lucky folks only reap the windfalls if they sell. For most people a B&D portfolio churning out 6-7% returns for a few decades – especially in a tax-free account like an RRSP or TFSA – is the best guarantee of lifelong security. You can always rent a place to live. You can’t rent an income.

Fourth, with mortgage money today available in the 2% range, why pay it off? That’s close enough to the inflation rate to be essentially free cash. Take your spare funds and invest them in a nice collection of ETFs instead of making up for your lender’s mistake.

And , finally, consider how to best weather some kind of economic storm. When it hits the fan, houses become illiquid fast. Financial assets, in contrast, can be liquidated in seconds giving you instant cash. Portfolios don’t need to be insured. There are no property taxes, closing costs when you buy or fat 5% commissions when you sell. No maintenance. No grass-cutting or dog hair to scrap out of the hot tub filter.

So think about it. A one-asset strategy could be asking for trouble.

What to do, then, if you have giant real estate debt and it keeps you up at night?

How to slay a Godzilla loan

Try this: a weekly-pay mortgage instead of a monthly one. It ends up making the equivalent of one extra monthly payment per year. That trashes amortization faster and saves a bundle, with a relatively small additional expense. (Just ensure you get the right kind of weekly mortgage, where each payment is one-quarter of the monthly one.)

Or, better, ignore your cheapo-rate home loan, invest and save like a crazed, financially-rabid beaver and when the mortgage comes up for renewal use a hunk of the portfolio growth to pay down the principal. Man, that will feel good.